Pakistan: The New Battlefield Between the US and China

March 28, 2019

In June 2018, Pakistan’s current-account deficit swelled to $19 billion.[1] Pakistan’s foreign exchange reserves are at a drastic four-year low, and the central bank has devalued the rupee by almost a third in the past year.[2][3] Pakistan has a history of financial instability and a weak central government. As this article will demonstrate, many of these same domestic factors are at play in the current Pakistani financial crisis. This time, however, the extent of Pakistan’s problems is exacerbated by a significant debt to China. A project known as the China-Pakistan Economic Corridor is a central piece in China’s ambitious international development efforts, known collectively as the Belt and Road Initiative. As the US-China conflict intensifies, it is essential to understand the threat of Chinese dominance in Pakistan and what the US can do to combat it.

The Effects of CPEC in Pakistan

China introduced its One Belt, One Road Initiative as a modern-day adaptation of the Silk Road. The project spans sixty-eight countries across Europe, Asia, and the Middle East and includes ambitious plans for infrastructure and development. The idea behind China’s initiative is that a trade network in Eurasia will open new markets for Chinese goods and will showcase China’s growing strength and influence.[4] While the project is geographically widespread in its ambitions, Pakistan is currently the largest BRI partner. Asian states like Pakistan are increasingly seeing China as a new superpower that is interested in their development and their connections with the world market.[5]

The aid from China has created some new opportunities for Pakistan. CPEC holds great potential to propel forward and modernize the Pakistani economy. The roads and infrastructure projects have enabled easier transportation of goods and raw materials and linked key commercial cities in Pakistan, like Lahore and Faisalabad, to other regional centers of production.[6] In particular, infrastructure and development projects have increased in the northern regions of Khyber Pakhtunkhwa and Azad Jammu and Kashmir. Many economists, such as Capital Economics’ Gareth Leather, acknowledge that this influx of activity has the potential to boost a stagnated Pakistani economy and could breathe new energy into the region.[7] Following the 2018 Pakistani elections, new Prime Minister Imran Khan restated Pakistan’s commitment to CPEC. On an official visit to Beijing in November 2018, Prime Minister Khan met with Chinese Premier Xi Jinping to reaffirm both nations’ commitment to a strong friendship and economic ties.[8]

As previously mentioned, the project has taken a toll on Pakistan. It seems that China is engaging in what some call “debt-trap diplomacy,” funding Pakistan with more than the country can pay back in exchange for priority access to trade routes in northern Pakistan and ports on the Indian Ocean.[9] Pakistan’s financial burdens have only grown more severe after the recent election. The Khan administration intends to implement a “Scandinavian-style Islamic welfare state” in Pakistan; such a significant increase in government spending is unrealistic because it would require Pakistan to increase the percentage of GDP collected in taxes from 12% to around 40%.[10] This is a radical departure from more conservative policies implemented by former Prime Minister Nawaz Sharif, and it is unclear whether these policies are realistic given the financial burdens imposed by CPEC.[11]

Given this increasingly unstable position, Pakistan faces several options. Pakistan can choose to take on more loans from China, but this temporary solution may not solve Pakistan’s long-term financial woes. As of January 2019, Pakistan had accepted $3 billion of aid from Saudi Arabia and received the first installment of a $3 billion pledge from the United Arab Emirates, but these are also short-term solutions.[12] Alternatively, Pakistan could seek a bailout from the IMF. Pakistan is no stranger to the IMF, having received 12 bailouts since 1988, most recently in 2013.[13] However, Pakistan would be subject to strict IMF regulation and would have to be very transparent about their relationship with China, including the size and composition of their loans.[14] Revealing this detailed information is unappealing to both China and Pakistan. Discussions between the IMF and Pakistan recently reached a stalemate over terms of the agreement regarding Pakistan’s currency and tax rate.[15] Members of the US Congress have voiced opposition to the IMF bailout, concerned that Pakistan might use the money, some of which is American, to pay back China.[16] While Secretary of State Pompeo said during a visit to Islamabad in September 2018 that the US would not necessarily oppose the bailout, the current administration seems unenthusiastic about using American funds to finance development efforts in Pakistan.[17]

US-Pakistan Relations

The United States has a history of providing financial support to Pakistan, often for geopolitical reasons. As a member of international organizations like SEATO and CENTO in the mid-20th century, Pakistan was sometimes considered “America’s most allied ally in Asia.[18] The US has had a positive relationship with Pakistan since the nation’s formation in 1947. During the Cold War, the United States used bases in Peshawar to monitor Soviet operations in Moscow. It was during the Cold War period that the US began to give initial military and financial aid to Pakistan, training and arming mujahideen to fight against the Soviet forces in Afghanistan.[19] After a period of more tense relations during the 1990s, Pakistan again proved to be a key ally after the September 11 attacks and the subsequent War on Terror. Following the attacks, the US established bases in Pakistan and the Pakistani government even agreed to moderate discussions with the Taliban and al-Qaeda before the death of Osama bin Laden.[20] However, the Bush and Obama administrations both expressed concern over Pakistan’s insufficient efforts to combat terrorism within its borders. Consequently, the Obama administration suspended $800 million in military aid in 2011.[21]

More recently, in his first tweet of 2018, President Donald Trump expressed increasing frustration with Pakistan: “The United States has foolishly given Pakistan more than 33 billion dollars in aid over the last 15 years, and they have given us nothing but lies & deceit, thinking of our leaders as fools. They give safe haven to the terrorists we hunt in Afghanistan, with little help. No more!”[22]

Since the tweet, the United States and other Western powers have considered placing Pakistan on a watchlist for terrorism financing, but they have not gone so far as to declare Pakistan a state sponsor of terrorism. Pakistan was named a major non-NATO ally in 2004, a designation that recognizes their strategic importance and gives them increased priority for military and financial aid.[23] Following the President’s tweet, the State Department announced that the US would cut transfers of equipment and security-related funds, as well as delay funds contingent on appropriate actions against terrorist groups.[24] In September 2018, the American government cut $300 million in aid to the Pakistani government, arguing that it had not done enough to combat militancy within its borders.[25] Recently, several prominent senators have grown especially concerned about China’s growing influence in Pakistan. They expressed alarm at China’s ability to “weaponize capital” by establishing a strategic network of ports across the Indian Ocean in places like Pakistan’s southern coast.[26]

The BUILD Act

In response to China’s international development efforts, the United States Congress passed the Better Utilization of Investments Leading to Development Act (BUILD Act) on October 15, 2018. The legislation consolidated many existing agencies into a new body, the United States Development Finance Corporation (USDFC), which is intended to direct investment towards development projects in low- and middle-income countries around the world.[27] The USDFC will direct private sector funds more effectively towards international economic projects. While the bill specifies a focus on “less developed countries,” it is still unclear which countries will benefit.[28] Unlike the BRI, the BUILD Act directs private sector funds directly to smaller organizations in developing countries. This allows for more small-scale development rather than the nationwide infrastructure programs that China is funding in countries such as Pakistan.

The Strategic Importance of Pakistan to the United States

The United States stands to benefit from pursuing a strong relationship with Pakistan while simultaneously decreasing China’s influence there. Given its economic and geopolitical influence, Pakistan is strategically important to the United States. US-Pakistan trade measured $6.4 billion in 2017, an almost 20 percent increase since 2013.[29] While Pakistan continues to be an appealing market for some American companies, bilateral trade is threatened by Pakistan’s deteriorating economy.[30] With increasing political tensions between the two countries, the Trump administration has considered placing sanctions on individuals in the Pakistani government.[31] However, sanctions would likely deepen the economic crisis in Pakistan, which could further trigger crises in the neighboring countries of India, Afghanistan, and Iran.[32]

Furthermore, Pakistan’s role in the War on Terror cannot be overstated. Pakistan became a key military and geopolitical asset to the United States following the September 11 attacks, and since then the two countries have worked together toward a peaceful resolution of the conflict in Afghanistan.[33] Though the United States has been frustrated with the extent and nature of Pakistan’s effort, its position in Afghanistan would be much worse without the help of Pakistan.[34]

Implications for the United States

Pakistani development is a central project that contributes to China’s recent increase in international, particularly pan-Asian, influence. Given the implementation of both the BRI and the BUILD Act, the US-China conflict seems to be playing out as a race for influence through international development, rather than the primarily ideological struggle that marked the Cold War with the Soviet Union. The US and China are not so much concerned with exporting their governmental structures as building a network of influence through nominally altruistic infrastructure and growth programs. This is a new type of conflict that requires especially innovative and thoughtful American policy decisions in places like Pakistan.

If the BUILD Act is meant to counter China’s growing global power, it is a step in the right direction.[35] However, the United States might consider focusing the allocation of resources and funding to countries like Pakistan, where influence is most crucial. In light of other regional tensions, keeping up with China’s ambitious plans for development abroad might also require looking past previous grievances with countries that could offer a strategic advantage. South, Southeast, and Central Asia are central regions in the BRI that have been largely overlooked in American foreign policy.[36] As Pakistan begins to reconsider the terms of CPEC, the United States has an opportunity to step in and provide an alternative solution to Pakistan’s current troubles.[37] This would require a substantial shift in American foreign policy toward actively helping Pakistan as opposed to alienating it. In an effort to promote US-Pakistan relations and undermine Chinese influence, the United States may decide to be more supportive of Pakistan’s pursuit of an IMF bailout and may reconsider the discontinuation of programs and funding meant for Pakistan.

Student Blog Disclaimer

The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

<h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> ﻿Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>